Supreme Court Sales Tax Decision Didn't Change Internet Taxation

By Wayne Rash |
Posted 2013-12-04

Supreme Court Sales Tax Decision Didn't Change Internet Taxation

The word is all over the blogosphere and Internet news sites that the U.S. Supreme Court's decision not to hear the sales tax case between Amazon.com, Overstock.com and the state of New York somehow gives the go-ahead for Internet taxation. It does not.

In fact, the Supreme Court chose to do nothing, reinforcing its earlier decisions on taxation. What the Supreme Court decided in Quill vs. North Dakota back in 1992 is that the U.S. Constitution's Commerce Clause says that one state can't tax activities in another state. This means that if you buy a book from Amazon, for example, your state can't place a sales tax on the book if Amazon is in another state.

Over time, states have decided that if a company such as Amazon has any presence in the state, then it can levy sales taxes. This means that in the 16 states where Amazon has a business presence, customers pay sales tax. Amazon has a facility in Virginia where I live, so I pay sales tax on my purchases through Amazon.

The state of New York, where Amazon has no facilities and no employees, decided that any partnership that Amazon might have in New York meant that it was in business there. This meant that any New York-based suppliers, including book companies, would trigger that exposure to sales tax. The state made a similar decision in regards to Overstock.com, which like Amazon has suppliers in New York, but no other presence.

This probably means that New York residents will end up paying sales tax on Amazon purchases, but that's still up in the air. This kind of thing has to go through a lot of lawyers before anybody pays anything.

What Amazon is hoping is that legislation currently making its way through Congress will clarify the issue before the court cases are finally resolved, since otherwise Amazon and other retailers would be stuck with a crazy patchwork of state and local regulations. "The Supreme Court already has addressed the sales tax issue, saying in Quill that Congress can and should act to resolve it," an Amazon spokesperson told eWEEK in an email. "The Marketplace Fairness Act now pending before Congress would protect states’ rights to make their own revenue policy choices while allowing them to collect more than a fraction of the revenue that's already owed."

Basically, what Amazon wants is a consistent law. Unfortunately, that's not going to happen any time soon. The current mood in Congress is that anything involving taxes that is proposed in one house is doomed in the other. Since the current sales tax law came from the Senate, it has no chance of passage in the house.

For now, each of the states will try to figure out on their own how to collect sales taxes from out-of-state companies while not violating the Constitution—or at least not violating it so egregiously that the Supreme Court decides to get involved. This in turn will lead to a situation where some companies simply collect the tax and then pay it, while others refuse. The companies that refuse will probably get sued by the states trying to collect it, which will lead to all sorts of Constitutional problems that will have to be appealed by one side or the other, or perhaps both.

Supreme Court Sales Tax Decision Didn't Change Internet Taxation

There are other options. Overstock has reportedly said that the company will simply break off relationships with companies in New York, thus keeping itself beyond the reach of New York's tax authorities. In the process, this will have a negative impact on those companies that used to work with Overstock, but now can't.

Some of those companies will go out of business as a result, while others will have their sales reduced. This, in turn, will cut the amount of tax that New York receives from companies that once were in this business, but now can't be. I've been trying to see who wins in that scenario, but so far, I don't see any winners except the state Attorney General, who can claim another victory when he runs for governor.

Meanwhile, we'll continue to hear from all sides how the requirement to pay sales tax will somehow doom Amazon's business. I hate to break it to them, but avoiding sales tax doesn't seem to be a major reason people shop online. The primary reasons seem to be convenience and selection. After all, if sales taxes had any impact, how is it that Walmart does so much business? Even in their online sales, they charge sales tax.

But what's most important to remember is that nothing in this current taxation battle is taxation of the Internet. The rules about sales taxes apply—whether customers place their orders by mail, phone, telegraph or online. It's not the Internet that's being taxed; it's the sale of products, regardless of how they're sold.